Tick

What Is a Tick?

A tick is a measure of the minimum vertical or descending movement in the price of a security. A tick can likewise refer to the change in the price of a security starting with one trade then onto the next trade. Since 2001 and the advent of decimalization, the minimum tick size for stocks trading above $1 is one cent.

Understanding a Tick

A tick represents the standard whereupon the price of a security might fluctuate. The tick provides a specific price increment, reflected in the nearby currency associated with the market where the security trades, by which the overall price of the security can change.

Prior to April 2001, the minimum tick size was 1/sixteenth of a dollar, which meant that a stock could move in increments of $0.0625. While the presentation of decimalization has benefited investors through much narrower bid-ask spreads and better price discovery, it has likewise made market-production a less profitable (and riskier) activity.

How a Tick Works

Investments might have different potential tick sizes depending on the market in which they participate. For example, the E-mini S&P 500 futures contract has a designated tick size of $0.25, while gold futures have a tick size of $0.10. Assuming a futures contract on the E-mini S&P 500 is currently listed at a price of $20, it can move one tick up, changing the price to $20.25 based on the $0.25 tick size minimum. However, with that minimum tick size in place, the price of the security couldn't move from $20 to $20.10 because $0.10 is below the minimum tick size.

In 2015, the Securities and Exchange Commission (SEC) approved a two-year pilot plan to widen the tick sizes of 1,200 small-cap stocks. This was done to promote research and trading in public corporations with market capitalization levels around $3 billion, as well as trading volumes below 1,000,000 shares daily on average. The pilot looked to widen the tick size for the selected securities to determine the overall effect on liquidity.

The pilot program began on October third, 2016 and ended just short of its two-year expiration date on Friday, September 28, 2018.

Results of the SEC's Tick Size Pilot Program

As per an article by Bill Alpert in Barron's, called "Congress' Failed Stock Market Experiment Cost Investors $900 Million," the idea for increasing tick sizes for small-cap stocks originated with David Weild IV, a former Vice President at NASDAQ who is casually known as the father of the JOBS Act.

Weild IV argued that because brokers, especially smaller brokers, had lost money because of the diminishment of ticks spreads in 2001, they at this point not put the time and effort into researching and advancing small-cap stocks. Increasing the tick size, he said, would be an incentive for brokers to take a gander at these stocks once more, and consequently more investment capital would flow to them, supporting their ability to develop their businesses, hire workers and develop the economy.

Weild's argument was meandering and didn't convince regulators or observers. However, he got the support of Delaware Democrat John Carney and Wisconsin Republican Sean Duffy. Their co-sponsored bill passed the U.S. House of Representatives, provoking the Securities and Exchange Commission (SEC) to institute its program.

The results of the pilot program were clear: increasing the tick size for small stocks created "a critical decrease in liquidity in the limit order book" as per one paper, and "a stock price decrease between 1.75% and 3.2% for small spread stocks" as per another paper.

The project failed, as per Alpert, because of tectonic changes in stock markets during the 2000s and 2010s. The rise of discount brokers and DIY internet trading undermined the old system where "market-production was dominated by 'bulge-bracket' brokers with teams of bankers, analysts, and salesmen who worked the phones and got generous commissions on trades of institutions and individuals." The brunt of the increased costs of trading was borne by investors who paid somewhere between $350 and $900 million for the experiment.

Tick as a Movement Indicator

The term tick can likewise be used to describe the direction of the price of a stock. A uptick indicates a trade where the transaction has occurred at a price higher than the previous transaction and a downtick indicates a transaction that has occurred at a lower price.

The uptick rule (eliminated by the SEC in 2007) was a trading restriction that prohibited short-selling except on an uptick, presumably to alleviate descending pressure on a stock when it is already declining.

The financial crisis that started the same year that the uptick rule was eliminated caused lawmakers to second-guess their decision. Instead of reviving the old rule, the SEC created an alternative uptick rule which restricted heaping on a stock that has fallen more than 10% in a day.

Features

• An experiment undertaken at the behest of the Securities and Exchange Commission (SEC) in 2016 increased the tick for 1,200 small-cap stocks from one cent to five cents for a long time to test the effect of larger tick sizes on trading.
• A tick is the minimum incremental amount at which you can trade a security. Since 2001 and the advent of decimalization, the minimum tick size for stocks trading above $1 is one cent.
• The SEC's experiment revealed that larger tick sizes decrease trading activity and raise trading costs.